A number of Hong Kong fund managers have begun the process of moving their existing unit trust funds to the open-ended fund company (OFC) structure to tap wealth management opportunities in the Greater Bay Area (GBA).
Although there are only about 14 OFCs belonging to five asset managers that have been registered with Securities and Futures Commission (SFC) as of March 2021, the number is expected to increase gradually in the coming months as more fund managers complete the registration process.
In recent months, Hong Kong fund managers have begun to see the advantages of the OFC structure as a means of tapping wealth management opportunities in China, particularly in the GBA, versus the more traditional unit trust structure.
Traditionally, the preferred fund structure for Hong Kong mutual fund managers was the unit trust, while hedge fund managers preferred the offshore limited liability company, typically domiciled in the Cayman Islands.
With the launch of the Wealth Management Connect scheme, however, there is a growing consensus among fund managers that the unit trust structure will be too unwieldy and cumbersome to be responsive for the fast-paced and highly dynamic markets that will evolve in the GBA.
The Wealth Management Connect is cross-border investment scheme for high net worth investors in the GBA that was launched by the Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBOC) on June 29 2020. The scheme covers Guangdong, Hong Kong, and Macau, which constitute the GBA.
The guidelines for the Wealth Management Connect Scheme have not yet been released but many fund managers who want to tap the scheme feel they have to be ready from day one. This means having a fund structure that will be able to anticipate and be responsive to whatever conditions and requirements the guidelines may contain.
The OFC structure is considered more flexible and efficient than the unit trust structure because the board of directors, who are also the fund managers, will also be in charge of the fund operations. This is unlike a unit trust structure, where the board/owners of the fund are traditionally different from the fund managers, who are more familiar with market developments, resulting in a gap in decision-making, especially under highly dynamic conditions.
Also, the OFC structure is considered more cost-efficient as it can result in savings of 7-10bp in terms of trustee fees.
The main disadvantage of the OFC is that most fund managers are largely unfamiliar with such a new and untested structure.
However, the government is seeking to encourage greater use of the OFC structure through such incentives as subsidies. In his 2021-22 Budget Speech on February 24, Financial Secretary Paul Chan announced a plan to offer subsidies for the costs of setting up a new OFC or re-domiciling a foreign investment fund as an OFC in Hong Kong.
The proposal, which requires legislative approval, is intended to provide subsidies to cover 70% of the expenses paid to local professional service providers for OFCs set up in or re-domiciled to Hong Kong in the coming three years, subject to a cap of HK$1 million per OFC.